What is Inflation ? Types Of Inflation And Its Examples-Basic Concepts Of Economy Part 1

Inflation Definition:

Inflation is a rate at which general level of prices for goods and service is rising and consequently purchasing price of currency is falling .

Let us see an example of inflation :

Let us assume a kilo of apple and a kilo of orange cost 100 and 50 respectively in 2010.

Now at year 2015 ,the cost of apple increased to 110 and cost of orange increased to 55.Both fruits we can see an increase of 10% .This general rise of price in goods and services is termed as Inflation.


So now what do you mean if their is a general price rise in some commodities ?

If a general price rise is some commodities happen, then that price rise is termed as Skewflation.

For example one can always see a trend in Indian economy where food price increase but other prices generally decreases.When we say just food price alone increased while comparing with other products ,then it is skewflation .

There are two types of Inflation.

1.Cost Push Inflation.

2.Demand Pull Inflation .

1.Cost Push Inflation :

Cost push inflation occur when their is an increase in  price of inputs like land,labour,raw material etc.

Increased in price rise ==> Decrease of supply of goods .This is a concern because demand for that particular product remains constant.(Look at the example given below )

When Cost Push Inflation generally occur ?

1.Natural disaster

2.Depletion of natural resource



5.Exchange rate changes etc.

Let us see an example

let us assume India has some oil reserve and oil demand in India is very high.Once the oil is depleted,then the raw material cost,input cost etc will increase as India have to import oil from other countries.Already  demand is on higher side, so it is mandatory for government to import oil from international market.This situation is related to cost push inflation.

Demand Pull Inflation:

Demand Pull inflation exists when demand for a goods and service outstrips supply.Demand pull inflation starts with increase in consumer demand.Sellers meet such demand with increasing the supply.But when additional supply is not available,sellers will increase the price of the products.This creates Demand Pull Inflation.

Increase In consumer demand==>Sellers Increase the supply==>When no additional supply ==>sellers increase the price ==>Demand Pull Inflation.

When Demand Pull Inflation generally occur ?

1 .When salary increases,consumer demand increases.

2.When government expenditure increases,investment increases and thus demand also increases.

3.Imbalance in demand and supply

4.When consumption expenditure  of people increases,demand also increases

5.Excessive monetary growth ,means too much money chasing too few goods.

6.Exchange rate-Depreciation in currency causes export to grow and import will be affected.This also cause demand in some of the sectors where country positioned to import.

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